In response to the covid pandemic, the UK government launched the Bounce Back Loan Scheme in May 2020 to offer a cash injection to protect SMEs and other small business owners.
With the pandemic creating huge levels of uncertainty and financial implications, the Bounce Back Loan Scheme offered very favourable terms for loans ranging from £2,000 to £50,000 with zero percent interest in the first year and rates of 2.5 percent fixed for up to six years.
In total, 55 percent of British SMEs accepted the loan, totalling 1.6 million businesses and a sum of £88bn lent out in total through a number of participating banks and lenders.
However, 18 months down the line, and the interest period over, UK banks are starting to collect repayments. But with a significant number of borrowers unable to pay back their loans, it has raised some questions over the eligibility process and what impact this will have on the UK economy.
SMEs struggling to repay
“Despite very favourable loan terms, there are a large number of businesses who cannot repay,” explains Dan Kettle of Octagon Capital, reflecting on the data that shows 83 percent of borrowers had requested a payment extension.
“Getting a personal or business loan, fully unsecured and interest-free for the first year is quite remarkable – plus you are paying only 2.5 percent thereafter regardless of your credit score. These are incredibly good terms and unsurprisingly, many people who didn’t even need the Bounce Back Loan took one anyway.”
“In theory, this should have really helped fledgling businesses who were impacted by Covid-19, including the food, transport, travel, events and hospitality industries.”
“But with very relaxed covid restrictions in the last six months, it is surprising how many people are requesting payment holidays or are struggling to repay, with recent default figures at £5bn per month.”
With Bounce Back Loans offering competitive rates and high approval, many opportunists decided to accept the loan, but have used the funds for their own personal virtues, according to David Green, head of brand at Fund Ourselves.
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“The scheme to help businesses through the pandemic was clearly needed and has helped so many businesses in the UK to keep going. However, the stories I have heard about businesses or individuals using the money for the wrong reasons have been somewhat shocking where some have regarded them as grants rather than loans and will find it difficult to pay back.”
“My gut feeling is that a vast majority of BBLs will not be paid back either simply due to lack of funds or they are no longer in business, despite the help and this will surely have an impact on the economy, but by how much is yet to be seen.”
Alfie Usher, founder of Forces Compare, agrees: “With your average financial product such as a personal loan or business loan, there are some very strict checks in place and for businesses, you need to demonstrate strong affordability and growth plans.”
“This was not the case for Bounce Back Loans. Even businesses that were really struggling or on track to insolvent, were able to borrow sums of £50,000 – and someone must pay this debt off eventually, whether it is the government or the taxpayer.”
The impact to the economy
One cannot help but consider the impact that such arrears will have on the UK economy, especially with defaults expected to exceed more than £21bn.
“The economy will definitely suffer from this,” says Rick Dent of Finger Finance. “We might see high inflation, high taxes or drastic changes in future borrowing, with banks only going to be more restrictive.”
“However, one can also argue the positive side of things and how many businesses are going to benefit from the initial injection of cash, which might have been absolutely vital for a business and its employees. Yes, there might be casualties, but without the Bounce Back Loan altogether, could the casualties have been significantly worse?”